How to find those potential diamonds in the rough

If you invest in stocks, it’s smart to consider adding some small cap companies to your portfolio. These smaller companies can often bring great returns that beat the overall market, and can often be had for relatively cheap. Of course, these small cap stocks come with risk due to their volatility.

If you really want to get adventurous, you can also explore investing in penny stocks, which generally trade for less than $5 per share.

(Some people also refer to these as micro cap stocks.) The markets are especially filled with penny stocks from the technology sector, many of which could rise quickly in value if a company’s product takes off.

The Basics of Penny Tech Stocks

Let’s be clear about one thing up front: penny tech stocks shouldn’t interest the average investor. They are risky, speculative, and unnecessary for most people to have in their portfolio. Most financial advisors will suggest that a typical investor stay away from penny stocks of any kind. But if you have a high risk tolerance and some patience, you could make a lot of money by investing in them.

Penny tech stocks have a number of things in common. First, they generally don’t trade on the major stock market exchanges such as the NASDAQ or New York Stock Exchange. Many are available on an “over the counter” bulletin board, or a stock quotation market known as Pink Sheets.

This means that they are not regulated as much as other stocks, and information is harder to come by.

In addition, penny tech stocks aren’t as liquid as other stocks. This means that once you buy them, you may have trouble finding someone to sell them to. This also makes them vulnerable to “pump and dump” schemes, in which someone buys a large number of shares, then sells them quickly after convincing other investors to buy as well.

How You Can Make Money

If you want to make money on penny tech stocks, you must first find a firm that you believe could actually generate some amount of market share. After all, no one who invests in a company is content to see its stock price hover under $5. As an investor, you can wait for a penny stock company to gradually build a product or service, increase sales and revenue, and eventually grow in overall value. It may also be smart to look at a company that was once larger and traded on a major exchange but has fallen into penny stock territory after some recent struggles. In such a case, at least there is a track record of past success to point to.

Penny tech stocks are unique, however, because they have the potential to rise in value very quickly, often based on a single piece of news. For example, let’s say there is a company called Techlandia Corporation. It’s a small company that holds a patent for a new kind of solar panel. Suddenly, this company is selected to be the solar panel of choice for the largest panel installer in the United States. With that news alone, the company’s stock price shoots up exponentially as investors consider the revenue opportunities for the company.

It’s also worth noting that investors may also be able to make money off penny tech stocks if the companies are acquired by larger firms. This can happen if a firm has a product or piece of intellectual property that a bigger company wants.

The State of Penny Tech Stocks

When examining penny tech stocks to consider buying, it’s best to look at overall emerging technology trends. There are several areas of technology that, while not yet mature enough to have an impact, could eventually revolutionize the way we live. Any company that is poised to take advantage of that breakout moment is worth watching.

There are a handful of industries and sectors with notable penny tech stocks. Early state biotech always offers the potential for big and sudden growth and features Galectin Therapeutics, which has a potentially groundbreaking treatment for fatty liver disease, and Viking Therapeutics, Inc., which has a number of drugs in its development pipeline.

Another part of the tech sector worth watching is software. Many small software companies are projecting good earnings this year, including ImageWare Systems, which is expecting new revenue from sales of its biometric security systems, and FinJan Holdings, a cybersecurity firm that recently bought back about $10 million worth of its shares.

Other tech-related industries worth watching include energy, IT services, and semiconductors, all of which have many penny stocks that could prove to be diamonds in the rough.